Sustainable Investing : is there a relationship between ESG ratings and fund performance?
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- Master's theses (HH) 
This paper studies the performance of 146 mutual funds with a Norwegian International Securities Identification Number (ISIN). Dividing the sample into quintiles based on a variety of metrics within Morningstar Sustainability Rating, I find no evidence of a marked-based outperformance by the top or bottom quintile funds. This would indicate that there currently exists no financial benefits or drawbacks to investing in high (or low) ESG-rated funds. However, there is a recurring notion of a geographical bias in the distribution of sustainability ratings. When isolating European-categorized funds (n=67) in the data for a more homogenous investment universe, several alphas are significant at the 10% level. The results show that the superior sustainability metric in the study; the Historical Portfolio Sustainability Score provides a monthly alpha of 0,4% in the top rating quintile and a 0,3% monthly excess alpha over the bottom quintile. In accordance with previous research, superior governance performance is found to influence risk-adjusted returns in a positive, statistically significant manner. Furthermore, I find evidence of an existing ESG-momentum effect in the Norwegian mutual fund market. Performance gains from increasing ESG-scores could indicate an existing reward connected to buying low sustainability funds and investing efforts into improving the funds’ sustainability through being an active shareholder.